In November 2017, I wrote an article about the proposed Tax Cuts and Jobs Act (TCJA). There were quite a few changes laid out in the proposed new law and there has been a lot of confusion as the bill went through several revisions before finally being passed into law. Many of the initially proposed changes were not implemented as originally expected. Last Month I wrote about how the new law temporarily doubles the estate tax exemption letting each of us give away during life, or pass away owning, up to $10 million (adjusted for inflation) without any gift or estate tax. Today we will talk about some of the income tax aspects of the law and how they might affect us today.

The old tax rates for the various brackets were 10%, 15%, 25%, 28%, 33%, 35%, and 39.6%. The new rates are 10%, 12%, 22%, 24%, 32%, 35%, and 37%. Most taxpayers will do better with the new brackets and rates, with a few exceptions. For example, individuals with income over $157,500 will be bumped up from the 28% rate to the 32% rate, and those with income over $200,000 will be bumped up from the 33% rate to the 35% rate. For married couples filing jointly, the only ones who will pay more are couples making between $400,000 and $416,700. They will get bumped up from the 33% bracket to the 35% bracket.

Some other big changes that will affect many is the doubling of the standard deduction to $12,000 (single), $18,000 (head of household), and $24,000 (married filing jointly); and the elimination of many other deductions that were previously available. Personal and dependent exemptions are eliminated. Miscellaneous itemized deductions subject to the 2% floor such as tax preparation expenses and employee business expenses have been eliminated. Personal casualty and theft losses are also eliminated. Alimony payments under new divorce decrees established after Dec 31, 2018, are not deductible. And moving expenses are no longer deductible (except for active-duty military who have orders to relocate).

Some deductions have just been limited or modified, such as a $10,000 total cap on deductions for State and local income, sales, and real property taxes paid. Home equity loan interest is no longer deductible, and interest on new mortgages taken out after December 14, 2017 is only deductible for up to $750,000 worth of mortgage principal borrowed. Interest on pre-existing mortgages that were new or refinanced before December 15, 2018 will continue to be deductible for up to $1,000,000 of mortgage principal borrowed.

Two positive moves in itemized deductions are regarding charitable contributions and medical expenses. Donations to charities used to be limited to 50% of your adjusted gross income (AGI), now you may deduct up to 60% of your AGI for charitable contributions. Medical expenses (such as doctor, chiropractic, psychiatric, dental, and vision care; prescription medicines, glasses, contacts, hearing aids, dentures; and long term care nursing home expenses) which are not reimbursed by any insurance are deductible to the extent that they exceed 7.5% of your AGI. Prior to this new tax law change, only your medical expenses in excess of 10% of AGI would have been deductible for 2017 and on. This reduced 7.5% hurdle is good for 2017 and 2018. Starting in 2019, we will only able to deduct medical expenses over 10% of AGI.

Another benefit is the elimination of the tax penalty assessed under the Affordable Care Act (Obamacare) for not getting health insurance. The penalty will still apply for 2017 and 2018, but starting in 2019, individuals may choose to not obtain individual health insurance and pay no tax penalty.

The final major benefit that can affect many small business owners is the 20% deduction on Qualified Business Income from a sole proprietorship, partnership, or S-Corporation, (or an LLC that elects to be taxed as any of the above). The rules related to the Qualified Business Income deduction are a bit complicated, but if you do own or want to start a small business, you could benefit from some tremendous tax savings under this new deduction. Please see a qualified attorney or tax specialist to plan on how to best take advantage of this opportunity.

So we see that there are a lot of changes with this new tax law, most of which are set to expire at the end of 2025. After that, most of these itemized deductions rules will return to the previous version, starting in 2026, unless Congress acts to extend portions of this law.

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